Perspective: Morning Commentary for September 26

September 26 – Treasury yields surged on this morning’s data dump, while stocks find support as well. The VIX slipped lower to trade near 15 following the data release, while the dollar index follows Treasury yields higher to trade near 100.9. Yields on 10-year Treasuries are trading near 3.80%, while yields on 2-year Treasuries are trading near 3.60%. Crude oil prices dropped sharply to trade near $67 per barrel overnight, but they firmed back above $68 after this morning’s data release. The grain and oilseed sector traded mixed to higher.

Durable goods orders were flat in August, which is down from 9.9% growth in July, but better than the 2.7% month-on-month contraction expected by analysts. Furthermore, durable goods orders minus transportation rose 0.5%, up from -0.1% in July and above expectations of 0.0%. Core durable goods, which is an indicator of business sentiment, rose 0.2%, up from -0.2% in July and above analyst expectations of 0.0%.

First-time claims for unemployment benefits slipped to 218K in the week ending September 21, down from 222K the previous week. The four-week moving average dropped to 224.75K claims, down from 228.25K the previous week. Continuing claims for the week ending September 14 rose 13K to 1.834 million, while the four-week moving average dropped by 6.5K to 1.836 million. These numbers do not indicate recessionary tendencies at this time. However, these numbers will need to be monitored in the weeks ahead with a longshoreman’s strike looking likely next week, and a large hurricane takes aim at the Southeast today. These factors will no doubt have an impact on the labor market and on the economy going forward, although today’s numbers suggest a solid base going into these events. The next monthly jobs report, to be released at the end of next week, will not yet include the impact of either of the above, or on the Boeing strike that impacts many related industries.

China fired an intercontinental ballistic missile into the high seas of the Pacific Ocean on Wednesday morning – a first since 1980 for it to do such. Official state media stated that the missile launch was a normal annual exercise, but I wouldn’t describe something as “annual” that you haven’t done in more than four decades. The ICBM was loaded with a dummy warhead, but it had the capability of carrying a nuclear warhead, allegedly as far as the continental United States. China’s Defense Ministry did not specify the missile’s flight path or landing location, but state media did state that relevant nations were notified in advance. Yet, Japan indicates that it received no such notice. The missile launch came as China and Russia were engaged in joint naval exercises near Japan. It also comes amid rising tensions in the South China Sea where China’s naval forces increasingly run have skirmishes with Philippine vessels. It also comes as China steps up military exercise with increased frequency near Taiwan, including intense missile firing and other military drills. Analysts say that the latter amounts to “greyzone warfare” tactics that are meant to normalize incursions. It’s not unusual for China to do missile tests, but they tend to be in its inland deserts for the most part, and unannounced by the government. However, this one was specifically launched into the high seas of the Pacific and then boldly announced, as if to send a statement to the United States to think twice about getting involved in a Taiwan conflict.

I wouldn’t call it panic, but there is a noticeable sense of urgency emerging from China’s leadership to address its economic problems, and to do so quickly, at least in the messaging. China’s National Holiday is October 1 – 7. In fact, this is a big one for China, as it celebrates 75 years of rule by the Chinese Communist Party. People will be traveling and talking, and the consumer mood has been quite poor. Ticket sales for domestic airfare during the holiday are down 23% year-on-year, which is 8% lower than pre-pandemic levels. Ticket sales to attend events were down as well due to consumer’s pulling back spending at a time when the CCP wants a celebratory mood. Foreign direct investment was down 31.5% year-on-year in August as the West continues to deleverage. As such, President Xi Jinping led a rare September Politburo meeting to discuss the economy, raising speculation that more stimulus is soon to be announced. The stock market surged again today, but it’s noteworthy that this week’s buying has largely been supported by state-backed funds, although private funds joined in today. China has stated that it sees the stock market’s performance as key to turning economic sentiment in the country. It’s also about the messaging ahead of the holiday. The 50-basis point mortgage rate cut announced this week to stimulate consumer spending doesn’t go into effect until December, but it was part of the pre-holiday announcement. Yes, China’s leadership is urgently seeking to turn the tide of consumer sentiment, but whether it will make the policy adjustments necessary to turn its economy around is yet to be determined. For the time being, it continues to export deflation, contributing to the decline in inflation in the States and elsewhere as commodity prices slide. The Federal Reserve’s rate cuts give China the room to stimulate, but if it’s successful, it will again be stimulating reinflationary pressures.